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What impact will an increase in the capital stock have on GDP and the price level?

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cherrylinguist eNotes educator | Certified Educator

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If we consider the long run, when capital stock increases (and all other things remain equal), there will be an increase in the gross domestic product (GDP), and the price level will drop. The increase in GDP causes an increase in aggregate supply. When capital stock increases, the potential output increases, as firms can invest in technology and hence be able to better utilize their resources. This in turn allows them to be more productive and efficient. An example would be in the field of agriculture, where farms can build more sprinklers to water the crops at fixed intervals of time. This automated process reduces the need for labor and allows the process of farming to be less time-consuming and more efficient. This efficiency and productivity means that the economy will be able to produce more goods using less resources. Hence, aggregate supply rises. Thus, when aggregate supply rises, GDP increases and the price level decreases.

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pohnpei397 eNotes educator | Certified Educator

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The most likely impact of an increase in capital stock will be an increase in GDP and a decrease in the price level.  This is because an increase in the capital stock will result in an increase in aggregate supply.

When an economy gains more in the way of capital, its aggregate supply curve shifts to the right.  This is because the economy can now produce more than it could before because it has things like more machines and more in the way of human resources.  When the supply curve shifts to the right, all other things being equal, we get an increase in GDP accompanied by a decrease in the price level.

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